Early Rally Snuffed Out by Prospect of Higher Taxes and Greece Worries

Today's financial recap and tomorrow's financial outlook.

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MINYANVILLE ORIGINAL Overnight in Japan, the ruling party led by Prime Minister Noda stated that it would dissolve the parliament by the end of the year, and make way for the opposition party. One outcome is that the opposition party, led by Shinzo Abe, has hinted that it would like to raise the inflation target for Japanese monetary policy from 1% to 3%, which is a significant jump. Consequently, the Japanese yen was particularly hard hit on the expected easing.

After opening higher, equities faded and successfully filled the overnight gap from yesterday's close. However, negative breadth (number of declining stocks outnumbering advancing stocks) continued throughout the day. After a news briefing by President Obama discussing increased taxes for the wealthy as well as the German newspaper Handlesblatt reporting that it was not likely that European authorities would vote on the Greek aid tranche at next month's meeting as planned, stocks sold off sharply.

Treasuries did not rise in concert with the sharp sell-off in equities, finishing only slightly higher on the day. This was likely weighed down by continued weakness from the yen and a slightly better performance from the US dollar.

Early in the morning, UK jobless claims rose more than expected, climbing by 10,000 compared to economist estimates for this figure to be unchanged from the month prior. Also, eurozone industrial production fell by 2.5% from last month, worse than the -2% consensus estimate.

In the afternoon, the FOMC released its minutes from the past month's meeting. Of note, the committee discussed quantitative targets for future interest rate and QE policy, but it is unlikely that this change in policy would go into effect in the near future. In addition, the committee noted that the $45 billion in long-term purchases of Treasuries under Operation Twist should be extended into outright balance sheet expansion once the program was completed at the end of the year.

Tomorrow morning the US will release weekly jobless claims and consumer price index (read: inflation) data. Due to Hurricane Sandy and winter storms in the Northeast, it is likely that claims data will be distorted for a second straight week. In terms of inflation, a drastic increase in inflation could see a muted response due to the expectation of continued Fed monetary easing next month.

In Europe, the eurozone will report GDP and CPI figures from the prior month. GDP is expected to decline to -0.6% from -0.5% on an annual basis and CPI is expected to decline to 2.5% annually.

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